Markets & Finance

More New Highs Likely

December 26, 2004

By Mark Arbeter The stock market broke out to new recovery highs last week despite weak levels of volume. Trading volumes this week are also likely to be muted as we finish up the year. We remain bullish on the stock market as we move into 2005 and we see the majority of gains occurring in the first half of the year.

It is our opinion that 2005 could be a transitional year for stocks, one in which the market moves from cyclical bull market to cyclical bear market, all within the confines of a secular bear market. There are a couple of very important cycle lows that are due to arrive in 2006, in our view, so the market could start heading lower during the third or fouth quarter of 2005.

One of the most accurate cycles from a historical basis is the four-year cycle. The stock market has put in intermediate-to long-term bottoms in 2002, 1998, 1994, 1990, 1987, 1982, 1978, 1974, 1970, 1966, 1962, 1957/1958, 1953, and 1949. While these lows don't occur like clockwork every four years, and past performance is not necessarily indicative of future results, the historical record is rather impressive. We will also note that many of the lows that have occurred during the four-year cycle tend to be lumped in the third and fourth quarters of the year.

The other key cyclic force, which may affect the stock market, is the 77/78-week cycle. This cycle low is expected in the later part of February 2006, giving the market ample time to possibly peak sometime in the middle to later part of 2005. The 77/78-week cycle just bottomed out in early September, just missing the low in August. The cycle also caught or was very close to predicting the lows in March, 2003, September, 2001, October, 1998, April, 1997, May, 1994, August, 1982, and March, 1978 -- and it was within months of calling the lows in 1970 and 1974.

The S&P 500 cleared chart

resistance in the 1205 zone on Thursday, Dec. 23, and was able to move to another new recovery high. The S&P 500 is at its highest level since August, 2001. Our next intermediate-term target for the index remains 1,253. This price target was calculated by adding the thickness of the consolidation that occurred in 2004, to the breakout point. The 1,253 level also represents the next Fibonacci target of 61.8% of the bear market.

Looking back to 1999 and 2000, there is also chart resistance that begins in the 1,250 area and runs to the all-time highs of 1,527. Chart

support for the S&P 500 lies in the 1,100 to 1,160 zone. The index has rallied an impressive 56% since the bear market low in October, 2002, and would need to gain about 26% to get back to the all-time high.

The Dow Jones industrial average broke above its early 2004 high closing of 10,737.70 on Tuesday, Dec. 21, and added to its gains the rest of the week. The DJIA is now at its highest level since June, 2001. The index is in an area of thick chart resistance that runs all the way up to the all-time high of 11,723. Near-term chart support for the DJIA is in the 10,400 to 10,600 zone. The DJIA has advanced about 49% from its October, 2002, bottom and needs to rise only about 8% to break its prior all-time high.

The Nasdaq is close to busting out but continues to struggle in the 2,150 to 2,170 area. Above this level, chart resistance, from all the way back in 2001, is up between 2,250 and 2,328, with the next layer starting at 2,300. Our next target for the Nasdaq, based on a Fibonacci retracement of 38.2% of the bear market and chart resistance, is up in the 2,500 to 2,600 zone. Chart support begins in the 2,075 area and is thick down to the 2,000 zone. The Nasdaq has surged 94% from its bear market low of 1,114.11 on October 9, 2002, and despite this rise, would still need to advance another 133% to get back to its peak of 5,048.62 from back on March 10, 2000.

Since hitting a 40-week cycle low last week, when yields on the 10-year Treasury note fell to 4.07%, the 10-year yield has backed up to the 4.22% area. The weekly moving average convergence/divergence (MACD) signal turned negative in early December, giving its first sell signal since early April. The 10-year broke above intermediate-term trendline support in early November and has traced out a series of higher highs and higher lows since bottoming out at 3.1% in June, 2003. Chart support for the 10-year runs from 4.25% to the recent high of 4.4%.

We believe the bond market is in a long-term transitional phase from secular bull market to cyclical/secular bear market. A clear break above the 4.4% support would clear the way for a back up in rates to the earlier year highs of 4.6% to 4.8%. During 2005, we believe rates on the 10-year could run up to the 5% to 5.5% area.

Crude oil reversed some of its strong recent gains and settled just above the $44 level last week. We believe crude oil is in an intermediate-term correction within a long-term bull market. Oil recently fell to the $40 level, retracing 50% of its advance from September, 2003, until October, 2004, a common retracement in a bull market. In our opinion, there is good chart support in the $40 area. Chart resistance lies between $45.50 and $50 and the 50-day and 80-day exponential moving averages converge just above $46. Long-term trendline support comes in at $38. We think crude oil will base for the short-to intermediate-term before resuming to the upside.

Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of September 30, 2004, SPIAS and their U.S. research analysts have recommended 29.2% of issuers with buy recommendations, 58.5% with hold recommendations and 12.3% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.

Disclaimers

This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's